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Behind the Music: How a Sony-BMG Feud Went Public

LOS ANGELES, Feb. 19 - Crowding into the Roosevelt Hotel on the evening of the Grammy telecast almost two weeks ago, the elegantly dressed executives from Sony BMG Music Entertainment had plenty to celebrate.

The soul singer John Legend, one of the company's newest stars, had snagged three trophies, including the coveted prize for best new artist; Kelly Clarkson, the former "American Idol" winner, scored a surprise two awards of her own.

But for the company's chief executive, Andrew Lack, the awards and congratulatory cheers that night may have seemed a little late. Barely 24 hours after the party, the music company's co-owners, Sony and Bertelsmann, announced a management shift that unseated Mr. Lack as chief executive, the result of a revolt sparked by executives from the Bertelsmann side.

Mr. Lack, 58, was named the venture's nonexecutive chairman, swapping titles with Rolf Schmidt-Holtz of Bertelsmann and ceding virtually all his authority over its daily operations.

Mr. Lack, who had most recently been president of NBC, was chosen by Sir Howard Stringer, then Sony's top official in the United States and now chief executive of the Japanese electronics maker. The party line was that an outsider like Mr. Lack, unencumbered by music-business customs or deep personal ties, had an edge in redefining the company -- even the industry.

But in the end, critics now contend, Mr. Lack turned out to be his own worst enemy.

While taking on industry convention, he failed to shore up relationships with critical players inside and outside Sony BMG and on its board, undermining his base of support.

One result is that there is new doubt about the ability of outsiders to pull the ailing music industry out of its tailspin.

"It's the subtleties of this business that can kill you," said Jay L. Cooper, a longtime Los Angeles music attorney. "I've seen some of the best and the brightest come into this business and be destroyed by it because they don't understand."

Further, Mr. Cooper said, "If you don't have the confidence and the respect of the people that are working for you, you've got a real problem."

Of course, Mr. Schmidt-Holtz, the incoming chief executive, is still regarded as a relative neophyte as well: he ran Bertelsmann's BMG unit for three years before it merged with Sony Music, but before that spent much of his career in television and magazines. Mr. Schmidt-Holtz must now try to prove not only that he can compete again in the unforgiving music arena, but than he can hold together the uneasy alliance between the venture's corporate parents.

Mr. Lack, who declined to comment for this article, departs the job as the company comes off a strong fiscal quarter and is poised to release a string of big titles. He is expected in his new role to remain active in steering the music giant's public policy initiatives and in guiding a Sony BMG film unit he created, which is planning a feature called "Reggaeton" this spring.

"I think he's going to make his presence known" in the new role, said Wayne Rosso, the former president of Grokster, the developer of an unauthorized file-sharing service. Mr. Lack broke from his industry rivals to forge an alliance with Mr. Rosso in devising a new, legal music service.

"I don't see him as a victim. I think he's going to be happier not having to baby-sit a lot of egos," Mr. Russo said. "The music industry is firmly entrenched in its habits, and it's a very parochial, self-preserving industry."

It is also an industry that viewed the blustery, theatrical Mr. Lack warily almost from the start. But he impressed insiders by striking the merger deal with BMG in 2003, about nine months after he started at Sony Music.

The venture, overseen by a board split between the parent companies, altered the balance of power in the $30 billion global music business, shrinking the field of major competitors to four from five.

With revenue between $4 billion and $5 billion, it ranked as the world's second-biggest music company, rivaling the industry leader, the Universal Music Group, a unit of Vivendi Universal. The combined company's stars included Bob Dylan, Jennifer Lopez, Alicia Keys and Britney Spears.

It also provided a financial cushion. Mr. Lack and his team presided over an estimated $400 million in cost cuts, which included cutting 2,000 people from the payroll. Sony BMG's sheer scale promised to give Mr. Lack more muscle to establish new standards in the industry, which has been desperately trying to reinvent itself in the era of file-swapping, CD-burning and iPods. But it also gave birth to an in-house rivalry -- and not the friendly kind -- between Sony's labels and BMG's.

From early on, Mr. Lack had particular trouble winning the trust of BMG executives; some complained privately that he seemed slow to extend contracts to the unit's label officials in important territories. "He would never have allowed that to happen to Tom Brokaw," one person close to Bertelsmann said, referring to Mr. Lack's job at NBC.

Others complained that Mr. Lack seemed unsure how to handle certain sticky issues. He landed in the middle of a volatile personnel affair when he was held accountable for an increasingly tense pay negotiation with BMG's top United States executives, the legendary hit-maker Clive Davis and his chief deputy, Charles Goldstuck.

Since Sony and Bertelsmann created the venture, the two executives had been waiting to settle a question about how the company would calculate a hefty payout still due them in connection with the 2002 sale of their venture, J Records, to BMG. After unsuccessfully prodding Mr. Lack to resolve the matter, the two men wrote a letter to the Sony BMG board expressing frustration at the standoff.

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Executives in the corporate suite were becoming frustrated with Mr. Lack, too. In July, Michael Smellie, a low-key BMG veteran who had been appointed Sony BMG's chief operating officer, had become so exasperated at Mr. Lack's leadership approach that he decided to quit, according to people close to him. In announcing his exit, he cited a desire to spend more time with his family in Australia.

Mr. Smellie, who had been one of the chief architects of the companies' complex integration, felt marginalized, according to people in whom he confided. He was largely limited to overseeing operations outside the United States, and while he initially backed Mr. Lack's appointment as chief executive, he lost faith that Mr. Lack could create a real culture for the merged company.

"The venture presented lots of opportunities, and a number of these were squandered because relationships were not as well managed as they might've been," Mr. Smellie said last week.

His exit, in particular, elicited deep concern among Bertelsmann executives, in part because it upset the venture's delicate balance of power. Mr. Smellie had been the most senior corporate executive from BMG. After word of his impending departure spread, he spoke with the head of Bertelsmann, Gunter Thielen, about his reservations about Mr. Lack, according to people briefed on the discussions.

The company's performance at the time appeared unsteady. Sony BMG posted two consecutive quarters of losses, its results burdened with revamping charges. For the first half of the year, Sony BMG's share of sales of new releases in the United States dropped to about 26 percent, off sharply from roughly 33 percent when the two companies combined, according to Nielsen SoundScan data. Much of the falloff at the time was attributable to the BMG labels, facing tough comparisons from the year before.

Mr. Lack's supporters have denied that Bertelsmann was dissatisfied with any aspect of his performance, and note that for the three months ended Dec. 31, the venture delivered $178 million in net income, roughly eight times its results from the year-earlier period.

Contributing to the results was a $121 million decline in revamping charges. Rather than losing confidence in Mr. Lack, they suggest that the German media conglomerate moved to destabilize him because it feared Mr. Smellie's exit would reduce its power in the venture.

Mr. Lack had certainly come to loom large in his first two and a half years in the business. He emerged as a blunt, ombudsman-like executive, sharply contrasting with rivals who were gleefully trumpeting the prospects for the budding digital market.

Last year he predicted that Sony BMG would not see a significant sales increase until 2008 (though a source close to him said he was now more optimistic). He said the company had "too many lawyers and accountants," while the relatively low percentage of people assigned to dig for talent was "appalling."

Even some critics found him refreshingly candid. Indeed, one curiosity of the internal discontent with Mr. Lack was that many of his critics agreed with his positions, for example, that the company should do more to use its music videos and other visual content to generate new revenue. Many also supported his stance that Apple Computer's iTunes music service should sell songs for a range of prices instead of its flat rate of 99 cents a song.

Being right, however, did not translate into respect.

And beneath the surface, some executives who worked with Mr. Lack even before the merger found his style less than inspiring.

"It was very difficult for him to approach any situation without assuming that whatever the 'record guys' were doing was wrong," said Rick Dobbis, who was president of Sony Music's international arm before being squeezed out in the merger, and is now a manager and industry consultant. "It was difficult to believe that you would get support for your ideas."

At the same time, Mr. Lack managed to alienate a number of longtime insiders by keeping them at arm's length -- including Allen Grubman, the powerful New York attorney who represents a bevy of top Sony BMG executives and artists, according to people who have discussed the matter with him.

"I think Andrew went out of his way to sort of buffer himself from us," said Jill Berliner, a Los Angeles entertainment lawyer who represents such Sony BMG artists as the Foo Fighters and the Offspring. "If that was supposed to be intimidating, it had the opposite effect. We weren't impressed."

Mr. Lack's supporters say that he is coming under fire from old-school executives who were simply resistant to change. Moreover, they say he is being unfairly attacked by artists' attorneys whom he tried to block from winning wasteful or potentially unprofitable contracts.

But critics say one of his biggest missteps was the handling of a $100 million-plus new deal for Bruce Springsteen, who had spent his career on Sony Music's Columbia label. The hefty contract required the approval of the venture's governing board, but critics say Mr. Lack presented the agreement to the panel as a fait accompli.

Mr. Lack's supporters insist that Mr. Springsteen was aware that the deal still required the board's sign-off, and that the deal will ultimately pay off for the label. Indeed, they suggest that Mr. Lack would have faced even heavier fire if he had allowed one of the company's most respected stars to depart his longtime home for a rival label, and eventually, to take his catalog of master recordings with him.

Even so, the affair damaged Mr. Lack's standing among the board members. Mr. Thielen soon informed Mr. Stringer of Sony that Bertelsmann wanted to remove Mr. Lack from his post.

To industry observers who had seen outsiders come and go before, that came as little surprise.

"Our business is not that big," said Ms. Berliner, the attorney. "If you're going to be successful, you get to know everybody, so you can channel relationships in ways that make sense. And I kind of felt like Andrew never got told that."